Dynamics Of The Silver Price Revolution
by Vincent Bressler
June 14, 2008

Recently, when silver was topping out at around $21 per ounce, there was an acute shortage of silver available for investing. This investment demand problem threatened to kick silver into an industrial deficit driven price revolution. The problem was resolved via unofficial rationing. New silver eagles and new 100 ounce bars have become increasingly unavailable since that time. In fact the time required to get new 100 ounce silver bars continues to increase. However, as the futures market price of silver went down from $21 dollars per ounce, weak hands holding silver once again have come forward to sell. The weak hands fear further price declines and are unable to wait because of financial stress. I monitor this by watching the prices on ebay. These prices have begun to converge with the futures price for the nearest delivery month. Smart, strong hands are buying this cheap silver. The silver price at this point in the cycle (illustrated below) is the Optimal Point, the point where Maximum Surplus of silver is available to investors beyond that which is consumed by industrial demand.

Over the last several years, the Maximum Surplus amount of silver available to investors at the Optimal Point has declined as the weak hands become extinct and the strong hands more certain of the coming price revolution. This game will be over when there is no more Maximum Surplus, no Optimal Point, and the only thing that can happen to free up more silver for industry is a price revolution. By forestalling the price revolution for so many years, the price managers of silver have battle hardened the strong hands. Industrial silver users and consumers will be big losers, and presumably, the price managers will be big winners, if that they own a lot of silver.

This last point inspires me to speculate about short of silver position on COMEX:

Let's assume that the immense short position on COMEX is not naked, but that it is held by an entity that is beyond the reach of the law or in some sense exempt. When the price revolution happens, what is the chance that this short of silver entity will deliver actual silver to the longs? The chance is approximately zero. First, there are strict delivery limits on COMEX right now and their rules are "flexible" to say the least, second, since the entity is exempt, who can make them deliver?

Those short of silver contracts will be settled in cash or not at all, depending on who the entity on the short side is and whether they have access to the FED begging bowl or printing press. So in the end, it really does not matter at all whether the short position on COMEX is naked or not. I believe that even Antal E. Fekete would agree with this, although I suspect that he would characterize the default as the end of the world, whereas I would call it business as usual.